It looks like the recent rally in the Canadian dollar is about to come to an end. Deutsche Bank, the world’s second-largest currency dealer, is warning its clients that the U.S. dollar is about to push the “loonie” even lower. The bank is forecasting that the CAD to USD exchange will dip down to $0.71 by the first or second quarter of this year.
In a note to its clients, Deutsche Bank says the recent rally in the CAD was based solely on an oil recovery. The problem for the Canadian dollar, it says, is that Deutsche Bank does not see oil recovering to high enough levels to make Canadian oil extraction profitable. This will push the CAD back down.
“While the CAD short covering should continue on the back of a deal to freeze oil production, oil prices should still stay far too low for Canada’s expensive oil sands, leaving Canada’s current account well in deficit and the Bank of Canada ready to ease,” Deutsche Bank wrote in a note to clients. (Source: “Canadian Dollar: USD to CAD Forecast to Rise to 1.40 by Deutsche Bank,” Pound Sterling Live, February 19, 2016.)
Deutsche Bank also offered a few more observations into how the Canadian dollar will further weaken against the greenback.
The bank doesn’t see much capital inflow from foreign investors, even with the slight oil recovery, as evidenced by the lack of demand for Canadian energy exchange-traded funds (ETFs). The bank added that foreign investors will likely sit on their hands until oil starts to trend back to the $50.00–$60.00 level that oil sands extraction needs to be profitable.
Deutsche Bank also doesn’t see much support from hedge fund managers buying the Canadian dollar.
“As foreign equities rally, the incentive for Canadian pensions to increase their currency hedging ratio drops,” Deutsche Bank wrote. “This removes a support for the CAD as they manage half of Canada’s foreign assets.” (Source: Ibid.)
With the recent CAD rally, Deutsche Bank believes that demand for Canadian exports will weaken.
The bank also believes that if the Canadian dollar keeps rising, the Bank of Canada will just step in to weaken the currency to help out weak oil exports: “Canada requires a weak currency for long as the economy slowly adapts to its post oil boom period.” (Source: Ibid.)
In a somewhat surprising insight, Deutsche Bank sees the U.S. economy strengthening, which will force the Federal Reserve to raise interest rates. This will provide another catalyst against the CAD to USD exchange rate. The bank believes lower oil prices and wage growth will support the U.S. economy.